INDIAN ESDM MARKET - ANALYSIS OF OPPORTUNITY AND

E X E C U T I V E S U M M A R Y

F R O S T & S U L L I V A N

INDIAN ESDM MARKET - ANALYSIS OF OPPORTUNITY AND GROWTH PLAN

An IESA - Frost & Sullivan Report

Supported by the Department of Electronics & Information Technology, Ministry of Communications & Information Technology

Government of India

IESA - Frost & Sullivan : Indian ESDM Market CONFIDENTIAL IESA COPYRIGHT2

Executive SummaryThe Indian electronics system design and manufacturing (ESDM) industry is one of the fastest growing sectors in the country. Witnessing uninterrupted growth, the ESDM industry in India is globally renowned for its consumption potential. Changing global landscapes in electronics design and manufacturing capabilities, and cost structures have turned the attention of global companies towards India. Companies from around the world are looking to build local capabilities in India not just to serve the resident market but also to cater to overseas markets.

This has resulted in the development of indigenous capabilities across the ESDM value chain in India. The different segments within the ESDM industry are at varying stages of development. Similarly, various electronics applications markets such as telecom electronics, automotive electronics, consumer electronics and industrial electronics, are at different stages of ecosystem development. The focus is currently on providing the necessary impetus to take advantage of the dormant capabilities across the various electronics markets and developing the missing links so as to make the local ESDM sector globally competitive.

The Indian ESDM industry was estimated to be $68.31 billion in 2012. The impressive guidance between 2011 and 2015 for this industry is expected to result in a Compound Annual Growth Rate (CAGR) of 9.88 percent. The corresponding size of the industry by 2015 is anticipated to be $94.2 billion. The following chart illustrates the total ESDM industry market growth:

94.20

0

10

20

30

40

50

70

80

90

100

60

20112010 2012 2013 2014 2015

India ESDM Industry Forecasts (2010-2015)

Base Year: 2011 Source: IESA-Frost & Sullivan

Reve

nues

($ B

illio

n)

84.1675.61

68.3164.6159.01

The ESDM industry in India comprises the following four key components:

1. Electronic Products

2. Electronic Components

3. Semiconductor Design

4. Electronics Manufacturing Services (EMS)

Of the above, the first two represent products while the remaining highlight the services opportunities catering to the domestic and export markets.

IESA - Frost & Sullivan : Indian ESDM Market

2014INDIAN ESDM MARKET - ANALYSIS OF OPPORTUNITY AND GROWTH PLAN

CONFIDENTIAL IESA COPYRIGHT 3

Developing the Ecosystem is Crucial for Bridging the Supply Demand Gap Much of the domestic electronics consumption in the country is served through imports. This does not bode well for the economic health of the country in the long term. Electronics imports, which are currently the third highest, next only to crude and gold, accounted for nearly $30 billion in 2012, and are forecasted to scale past $50 billion in just 3 years. From a detailed assessment of the electronics market, total market (TM) was estimated to be $44.81 billion in 2012, representing a growth of 7 percent over the previous year. The TM is expected to grow at a CAGR of 11.5 percent and reach revenues of $64.85 billion by 2015. Total domestic market (TDM) for 2012 was estimated to be $17.07 billion, representing a growth of 11 percent over 2010. Growing a CAGR of 10.4 percent, the TDM is expected to scale to $22.66 billion by 2015.

The chart below represents the TM and TDM forecasts for the Indian electronics market.

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20112010 2012 2013 2014 2015

India Electronics Product Market: TM, TDM Forecasts (2010-2015)

Total Market ($ Billion)

Total Domestic Manufacturing (High Value Add, $ Billion)

Total Domestic Manufacturing (Low & Medium Value Add, $ Billion)Base Year: 2011 Source: IESA-Frost & Sullivan

CAGR (2011 - 2015)

TM: 11.5%

TDM (overall): 10.4%

TDM (Low/Med value add) : 12.3%

TDM (High value add): 3.9%

18.33

15.57

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17.07

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44.81

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11.8911.54

15.27

41.91

14.67

39.21

10.55

4.12 3.74 3.55 3.623.9

4.35

Note: Total market or TM refers to the domestic electronics consumption in India which therefore includes all locally manufactured and locally consumed products as well as imports.

Total domestic market or TDM refers to the domestic production that caters to domestic demand. Value addition is classified into two broad categories:

1. Low/Medium Value Add: Includes negligible sourcing, minimal design activity, EMS, SKD and CKD assembly; corresponds to value addition of upto 50% (<20% being low value add and 20%-50% being medium value add)

2. High Value Add: Includes high local sourcing, high levels of indigenous design and complete system manufacturing; corresponds to a value addition of >50%.

Some of the key observations include:

• 65percentofthecurrentdemandforelectronicsproductsismetbyimports.Importsarelikelytogrowfrom$28billionin2011to $42 billion in 2015 in the absence of intervention

• Highvalueaddedmanufacturingislikelytoberestrictedtolessthan7percentin2015.Thisrepresentsacumulativeopportunityloss of $200 billion between 2011 and 2015 in the absence of intervention

• Increasing totaldomesticmanufacturing to50per centby2015will create additionaldirect employment fornearly 2 lakhpeople

• ThereisaverypertinentneedtorecognizetheESDMindustryasaprioritysectorandprovideafavourableenvironmentforitsgrowth


Government as an Enabler for the ESDM SectorThe Indian Government, through the Department of Electronics and Information Technology (DeitY), has instituted a number of forward-looking policies to foster the growth of the Indian electronics ecosystem. These policies are aimed at holistic development of the ESDM industry by offering specific incentives for the development of each element in the value chain. These forward looking policy measures include:

National Policy on Electronics (NPE): The objective of the NPE is to create an ecosystem for a globally competitive ESDM sector in the country by attracting investment of about USD 100 billion and generating employment for around 28 million people at various levels. The ultimate aim of the policy is for the Indian ESDM sector to develop core competencies in strategic and core infrastructure sectors like telecommunications, automobile, avionics, industrial, medical, solar, information and broadcasting, railways, intelligent transport systems, etc.

National Manufacturing Policy (NMP): The government has brought out the NMP to increase the growth of the manufacturing sector to 12 to 14 percent over the medium term and enable manufacturing to contribute at least 25 percent to the National GDP by 2022.

Modified Special Incentive Package Scheme (MSIPS): The MSIPS aims to offset cost disabilities and attract investments in the India ESDM sector through an INR 10,000 crore corpus. Subject to certain investment thresholds, subsidies to the tune of 20 per cent for SEZ units and 25 per cent for non-SEZ units will be given on capital expenditure along with reimbursement of excise/CVD.

Setting up semiconductor fabrication units: The Government of India has received the applications of two consortia(IBM,JaypeeGroup,TowerJazz;STMicroelectronics,HSMC)toestablish2semiconductorwaferfabricationunitsinGujaratand Noida with the aim of operating at 20 nm process node within two years of initial operations and reaching a capacity of at least 40,000 WSPM of at least 300 mm size. Various incentives are being offered by the government to this effect: 25 per cent subsidy on capital expenditure and growth capital expenditure, reimbursement of CVD and excise duty, exemption from basic customs duties and 200 per cent deduction on R&D activities, among other incentives such as reimbursement of training costs, deduction for income tax and various forms of viability gap funding.

Electronic Manufacturing Clusters (EMCs): The government is offering financial support for the development of EMCs. For greenfield EMCs, assistance will be given up to 50 per cent of the project cost subject to a ceiling of INR 50 crore for every 100 acres of land. For brownfield EMCs, assistance will be given up to 75 percent of the project cost subject to a ceiling of INR 50 crore.

Electronics Development Fund (EDF): The EDF aims to create an ecosystem of R&D in electronics in India which will promote IP generation and large scale manufacturing, while simultaneously fostering the growth of the ESDM ecosystem. The focus of EDF will largely revolve around small and medium enterprises (SME) in line with the goal of promoting innovation and job creation.




The chart below captures the salient features of the various government initiatives to promote the Indian ESDM sector.

To attract investment of

USD 100 billion and generate

employment of 28 million

Aim to reach 20nm process

node within 2 years of initial phase,

and reach at least 40,000 WSPM of

300 mm

IBM, Jaypee, and TowerJazz;

and STMicro electronics and

HSMCgotapprovalin principle

to establish 2 semiconductor

fabsMSIPS makes

available a corpus of INR 10,000

crore to attract investment in

ESDM

25% subsidy on capex; CVD and

excise reimbursed; BCD exempted;

200% R&D deduction; etc. EDF is a planned

scheme of DEITY to create ecosystem of electronics R&D

and promote IP generation

Focus will largely be on SMEs in line

with the goals of promoting

innovation and job creation

Brownfield: 75 per cent of project cost subject to ceiling of

INR 50 crore

Greenfield: 50 percent of project

cost subject to ceiling of INR 50

crore for every 100 acres of land

Financial support will be offered for development of

EMCs to aid growth of ESDM through innovation and

entrepreneurship

Scope of policy includes:

nanoelectronic, semiconductor fab, solar, LED, LCD, passive components,

and EMS

20% Capex subsidy for SEZ

units; 25% Capex subsidy for non-SEZ

units and CVD/excise

reimbursed

NPE’s vision is “to create a globally

competitive ESDM ecosystem to

meet the country’s needs and serve the international

market.”

NPE’s mission is to promote

manufacturing and R&D across the value chain,

especially in strategic

electronics

Source: IESA-Frost & Sullivan

Indian ESDM Industry: Snapshot of Government Policies

Identification of High Priority Product MarketsHolisticdevelopmentoftheecosystemcanbethepanaceatoallofthewoesoftheIndianESDMindustry.However,applicationofthe Pareto principle at a broad level suggests that identifying the products that accounts for nearly 80 per cent of the electronics market revenues and provide the necessary support and incentives required to eliminate the disability costs associated with local manufacturing/value addition in these products shall enable enormous development in the overall ecosystem. Initiatives aimed at promoting indigenous value addition in the top 20-25 percent of products is expected to have a cascading effect on the remaining 75-80 percent of the products. In line with the Pareto principle, it is observed that the top 20 product markets accounts for 80 percent of the overall electronics TM revenues for 2012, as indicated by the chart next page.


Mobile Phones

Digital Camera

LCD Monitors

Set Top Box

CFL

FPD TV

Inverters and UPS

Servers

Printers and FPDs

Energy Meters

Notebooks

Memory cards and USB drives

Base Stations

Routers / Switches

Digital Instrument Clusters

Desktops

4W EMS

Power Supplies

Car Radio

Smart Cards

ProductRevenue

% of Total

Mobile Phones 38.85%

FPD TV 7.91%

Notebooks 5.54%

Desktops 4.39%

Digital Camera 2.73%

Inverters and UPS 2.65%Memory cards and

USB drives2.46%

4W EMS 2.33%

LCD Monitors 2.02%

Servers 1.72%

Total of Top 10 Products

70.60%

ProductRevenue % of Total

Base Stations 1.61%

Power Supplies 1.28%

Set Top Box 1.13%

Printers and MFDs 1.06%

Routers/Switches 1.05%

Car Radio 1.02%

CFL 1.00%

Energy Meters 0.66%Digital Instrument

Clusters0.58%

Smart Cards 0.52%

Total of Top 20 Products

80.52%

Indian Electronics Market: Top 20 Products by TM Revenues (2012)

Base Year: 2011 Source: IESA-Frost & Sullivan

Beyond just these top 20 products, it is also essential to identify as high priority those product markets that are currently not amongst the top 20 in their contribution to the overall revenues, but have growth trends in excess of even these top 20, thus indicating their potential to be significant product markets by 2015. Identifyingfive such products with significant CAGR trends and providing them the necessary impetus for ecosystem development is also important for the growthof the ESDM industry. The chart below highlights five such products across industry segments that have the potential, and hence, deserve the thrust.

Indian Electronics Market: Top 5 Products by with Highest CAGR (till 2015)

Industrial Electronics

• LEDLighting(CAGR=38%)

Automotive Electronics

• 2WIgnition(CAGR=10%)

IT/OA

• Tablets(CAGR=54%)

• PaymentTerminals (CAGR=19%)

Telecommunications

• PON,GPONONT(CAGR=120%)

2012 Electronics Product TM=$44.81Billion




SWOT Analysis of the 25 High Priority Product Markets

ThecharacteristicsoftheseproductmarketswithregardtotheIndianelectronicsecosystemvaryverywidely.Hence,theyneedtobe evaluated thoroughly with regard to their strengths, weaknesses and growth prospects among other factors in order to gain a thorough understanding of their unique market dynamics. This report contains detailed evaluation of the market dynamics, current ecosystem availability, disability factors restricting local value addition and future potential for these 25 high priority products. The chart below highlights the consolidated strengths, weaknesses, opportunities and threats for these 25 high priority products.

Consolidated SWOT Analysis of the Ecosystem for the High Priority 25 Product Markets

SWOT

STRENGTHSHugeConsumptionMarket.

Strong Design and R&D Capability in Select Products - Auto electronics, industrial etc.

Government Schemes a Good Demand Generator - NKN, NOFN, tablets for education sector, digitization policy, broadband push etc.

Adequately Developed EMS Industry - to be a significant contributor to ecosystem development.

Enormous ResidentTalent in Semiconductor Design and Embedded Software

OPPORTUNITIES Significant Local Demand as a Influencer for Investment Attraction

Rising Manufacturing Costs in China Leading to India as Alternate Destination

Government Policies - MSIPS, EMC, local FABs etc Favour Attracting Manufacturing Investments

Export Potential - huge consumption market in ME; emerging growth markets of North Africa and Latin America.

Existing R&D Capabilities can be Encouraged to Develop ‘Made in India’ Products and Generate Local IP

WEAKNESS Reliance on Imports for all Critical Components - Semi battery, LCD displays, electronic components etc

Convoluted Tax and Duty Structure - Imports made Cheaper than Local Products.

Debilitating FTAs with Thailand, Japan.

Lack of Subsidies/Incentives for Support Industries makes Local Manufacturing Costlier

Inadequate Domestic Standards andTesting Facilities. Slow and Delayed Policy Implementation

Inadequate Local Product Innovation and IP Creation

THREATS Established Manufacturing Ecosystem in China poses a Major Threat.

Emergence of other Low Cost Manufacturing Destinations like Vietnam.

Inadequate / Fledgling Ecosystem for Components and Raw Materials.

Infrastructure Inadequacy as Demanded by Certain Sectors - Electricity, Water, Utilities etc,

Depreciation of the Rupee as a Short Term Threat.

Component Ecosystem for the 25 High Priority Product MarketsResearch indicates that the most crucial elements for the development and sustenance of a robust ecosystem include:

• Ahealthyconsumptioneconomywithexportpotential

• Design,developmentandR&Dcapabilities

• Availabilityofrawmaterialstolocallysource

• Infrastructureadequacy

• Favourablepolicyenvironment

• Availabilityofnecessaryskillsets

Local availability of components/raw materials is considered very significant for achieving high local value addition in any product manufacturing. Moreover local supply of components ensures faster turnaround time and lesser production cost; this is why globally, component supply/manufacturing is closely located along with product manufacturing locations. Absence of a component ecosystem is a major disability in electronics product manufacturing. To evaluate the significance of this, the research did a detailed assessment of the local ecosystem for the top four components in each of the 25 high priority products. The table below provides a snapshot of the 25*4 matrix.


S.No Product Component 1 Component 2 Component 3 Component 4

1 Mobile Phone Memory (22%) Display (19%) Application Processor / System on Chip (15%) Camera

2 FPD TV Display( 50%) IC’s ( 15%) Electromechanicals ( 15%) Power ( 5%)

3 Notebooks Display (18%) Processor (15%) Motherboard (12%) HDD(10%)

4 Desktop Processor (15%) Monitor (15%) Motherboard (12%) HDD(10%)

5 Digital Camera Lens (30%) Image processor (15%) Image sensor (15%) Battery (10%)

6 Inverter, UPS Transformer(50%) Power Semiconductor(10%) Heatsink(10%) Microcontroller(5%)

7 Memory Cards, Drives Flash Memory chip (80%) Microcontroller/ASIC(5%) Crystal Oscillator (5%) USB connector (5%)

8 EMS 4 W Mechanicals - Pump, Injectors (40-50%) Analogs+Sensors (20%) Microcontroller (10%)

9 LCD Monitor Display( 50%) Electromechanicals ( 15%) IC’s ( 10%) Power ( 5%)

10 Servers Processor (25%) Memory (25%) Motherboard (15%) HDD(12%)

11 BTS IC (40%) Power Amplifier (15%) Power supply (12%) Antenna (10%)

12 Power Supplies Transformer (30-40%) Power Semiconductor Rectifier diodes PCB

13 Set Top Box IC (MPU,Memory,Tuner) PCB Power supplies Plastics and Mechanicals

14 Printers & MFDs Photosensitive Drum Fusing Roller Transformer Lens and scanner

15 Routers / Switches Software & OS (50%) Processor (10%) Memory (10%) Electromechanicals

16 Car Radio IC’s ( 30%) Electromechanicals ( 20%) PCB ( 10%) Power ( 10%)

17 CFL Lamps Capacitor (20%) Glass tube (20%) Transformer (10-15%) Transistor (10%)

18 Energy Meters System on Chip (20%) Transformer (20%) LCD Display and backlight (15%) Super Capacitor (10%)

19Digital Instrument Cluster

Stepper motor (20%) PCB (15%) Microcontroller (10%) LCD (7%)

20 Smart cards IC’s (62.5%) PETG/Polycarbonate body (20%) Software OS (10%) Antenna ( wire or

printed) (7.5%)21 GPON ONT Optical Module (35-40%) System on Chip (15%) Power Supply (8%) Memories (5%)

22 Tablet Display (38%) Memory (10%) Battery (10%) Processor (10%)

23 LED Lights LED (25%) Driver (20%) Heatsink(15%) Thermal interface material (7%)

24 Payment Terminals

Communication Module (16%) LCD/TFT Display (16%) Printers (16%) Processor (14%)

25 2 W Ignition Microcontrollers (20%) Power semiconductor (20%) CDI Capacitors (10%) Transformer (10%)

The percentage in brackets in the table above indicates the contribution of each component to the overall product bill of materials (BoM). The most common components that are within the top 4 BoM contributors across these 25 products are the following:

•Powerdevicesandsemiconductors

•Processor

•Memory

•Printedcircuitboard(PCB)

•LCDdisplay

•Transformer




Semiconductor Ecosystem Assessment

• GlobalhubforVLSIandboarddesign

• Strongthirdpartydesignservice providers

• Hugedomesticelectronicsconsumption market

• PresenceofR&Danddesigncentres of the top 23 global semi majors

• VerylimitedIPcreation

• RestrictednumberofFablesscompanies

• InadequateATMPfacilities

• AbsenceofFab

• FundforFablessPromotion

• EncourageATMPinvestmentsunder MSIPS

• Expeditethesettingupof2Approved Fabs

• IncentivizelocalsourcingofSemi

• LocalFabstofabricatechipsinhigh demand

CHALLENGES


STRENGTHS RECOMMENDATIONS

Semiconductors: As observed, 3 of these top 5 key components (power semiconductor, memory and processor) include semiconductor chips and devices. Currently, the absence of a local fab implies complete reliance on imports for these components. The FAB initiative that is expected to usher atleast 2 semiconductor fabs in India in the foreseeable feature shall help in making these core chips available locally. Given the numerous applications that require processing capability, creating an India-specific processor design, and fabricating them in local chips shall ensure a significant contribution to the local value addition.

Printed Circuit Board (PCB): IndiahasagoodnumberofPCBmanufacturersinthecountry.Howeverthelocalcapabilityis restricted to producing single, dual and multi layered PCBs of upto 8-12 layers. The PCBs needed in most of the 25 high priority products, especially in telecom, consumer and automotive applications, require complex multi-layered PCBs that are not available locally, thus necessitating imports. Building on the existing capability, special initiatives need to be targeted to encourage indigenous design and manufacturing of multi-layered PCBs of upto 64+ layers. This will ensure local sourcing of PCBs for product manufacturers, thus contributing to higher value addition; this shall also meet the requirements of the local EMS players who source PCBs in bulk.

PCB Ecosystem Assessment

• PCBmanufacturingcapabilityexists locally

• Strengthsinsingle,duallayers

• Capabilitytodomultiplelayers too for less complex applications

• Exportmarketexists

• InabilitytocompetewithChinese imports on cost – Chinese exporters get 17% export incentive

• Workingcapitalchallenges

• Exciseandcustomsdutyprocedural issues

• HighimporttariffonPCBimports. Nil duty on raw material imports.

• Interestsubsidies/lowinterestloans for PCB manufacturers

• Quicker,easierreimbursementofCENVAT

• Exportsubsidies

CHALLENGES




LCD Displays: In the case of LCD displays, India possesses local design and manufacturing capabilities for some of the end useproducts. However, the cost of production of panels and its technology-intensive nature have kept India void of an LCDdisplay assembling/manufacturing unit hitherto. Other challenges include the existing duty structure which makes importing a cheaper option for displays. Given the high volume demand anticipated in the various products that consume displays, it becomes pertinent to grow the ecosystem for LCD displays locally.

LCD Display Ecosystem Assessment

• Hugeconsumptiondemand

• Enduseproductmanufacturing through OEMS and EMS exists

• Favourableincentivesforpanelmanufacturing available under MSIPS

• Ecosystemdoesn’tprevail

• Inverteddutystructure

• DebilitatingFTAswithThailand, Japan etc

• Infrastructuralchallenges

• RelocationofabrownfieldGen5fab

• Preferentialexcisedutyforpanelmanufacturing; tax rebates.

• Hikeinimportdutyoffinisheddisplay imports

• Fundtoencouragelocaltechnology development

CHALLENGES



Transformer Ecosystem Assessment

• Hugeconsumptiondemand

• Enduseproductmanufacturing through OEMS and EMS exists

• Localdesignknowhowandmanufacturing technology skills exists

• Locallandedcostofproduction high: makes imports cheaper

• Relianceonimportsforcopper

• Delayedturnaroundtimedueto copper import time

• Preferentialexcisedutyfortransformer manufacturing: tax rebates.

• Subsidiesonlogisticcostsofcopper import to reduce product landed cost

• Specialinterestloansforworkingcapital for SME

CHALLENGES



Transformers: Transformers belong to the larger family of wound components. This is a market that is dominated by small scale indigenous manufacturers as it requires limited infrastructure and inexpensive labour. Consumer and industrial electronics segments drive the demand for transformers and, owing to cost advantage, transformers are predominantly imported from China, Taiwan and South Korea. Reliance on import for raw materials, specifically copper, is a major handicap for Indian transformer manufacturers in achieving faster turnaround time as well as lower production costs.




Product Specific Recommendations Each of the 25 high priority product markets has varying levels of developed and underdeveloped ecosystems and while there are some common initiatives that are required for eliminating the disabilities associated with local value addition across the 25 products, there are certain specific steps that need to be taken product-wise to enable holistic development of an ecosystem thatservicesthelocalmarketandholdsexportpotentialaswell.Herewesummarizesomeofthesekeymeasuresthatshallhelpprovide the necessary impetus to these high priority product markets.

Mobile phones• OfferingincentivestodevelopIndiaasahubformobilephonesbatteries

• Developingpoliciestoaddressthedisabilitycostsassociatedwithlocalmanufacturingthrough

- exemption of CVD on imported capital equipment and excise duty on capital equipment sourced locally;

- levying of a tax equivalent to CST on imported mobile phones;

- basic customs duty and CVD exemption from on all imported capital equipment for manufactureof mobile phone parts and components.

• Developing India-specific certifications to ensure quality of products.Thiswould also act as a non-tariff barrier thatwouldincentivize local manufacturing.

Flat panel TV• Encouragingdomesticassembly,includinglowvalueaddactivities,toboostlocalsourcingandgenerateemploymentinthe

long run.

• SettingupacenterforexcellenceforLCDandLEDdisplaystoencourageindigenousdevelopment

• ProvidingincentivesundertheMSIPsschemetobringFPDpanelassemblyactivityintoIndia.

Notebooks, Desktops, Servers• Simplificationofthereimbursementprocessforclaimingtaxcreditoninputdutypaid

• IncentivizingmanufacturingofmotherboardandLCDdisplaysforlaptops/desktopsbyexemptingtheirindividualcomponentsfrom basic customs duty and excise duty, or offering preferential excise duty.

Digital Cameras• NeedforDutyrestructuring-TheCENVATfordigitalcamerasisaround16%andanexcisecessof2%againstanimportdutyof

10% makes it more expensive to assemble or manufacture locally.

• Thecomponentecosystemandtechnologyleadershipforthissegmentbeingnon-existentinIndia,focuscanbeondevelopingbatteries for digital cameras rather than the product itself.

Inverters and UPS• Encouraginglocalmanufacturingbyloweringexcisedutyandmakingtheprocessofreimbursementoftaxcrediteasierand

quicker.

• MakingappropriateR&D investmenttogainexpertise in thedesignandmanufacturingofUPSwithhighpowerrating.Theplanned EDF corpus of DeitY could be an appropriate way of implementing this measure.

• ProvidingenergystarratingsundertheaegisofBureauofEnergyEfficiency(BEE)shallhelpinfosteringgrowthofsolarpoweredUPSaswellaspowerefficientUPSandinverters.ThehigherratedUPS/inverterswouldhavemoresophisticatedelectronicsandsemiconductors, thus boding well for the semiconductor market as well.

Memory Cards and USB Drives• Consideringthelowmarginsandthemagnitudeofinvestmentrequiredtosetupaflashmanufacturingfacility,itseemslogical

to divert the available resources towards other areas that would offer greater and faster returns on investment.


Automotive sub systems (CDI, Digital Instrument Clusters, 4W EMS, Car Radio)• SettingupofanautomotiveEMCpossiblynearChennaiorintheNCRtocompletelyindigenizethemanufacturingof2Wignition

units.

• IncentivizingthemanufacturingofPCBsandLCDdisplaysbyofferingpreferentialexcisedutiesorgreaterratesofCENVATcredit.

• Leveraging theMSIPS and EMC policies to set up an automotive EMC near the Bangalore-Chennai area to indigenize themanufacturing of instrument clusters.

• AttractinginvestmentthroughtheMSIPSpolicy,preferentialexcisedutiesorgreaterratesofCENVATtoprovideimpetusformanufacturemicrocontrollers in the country; the setting up of the two semiconductor fabs in the country would prove to be a great enabler in this regard.

• SettingupacenterofexcellenceforcarinfotainmentneedswithinanautoelectronicsEMCtoencourageindigenousdesignthrough frugal innovation.

• SettingupofautoelectronicsclusterunderEMCeitherinChennaiorPunewithfacilitiessuchasincubationcentertopromoteinnovation research, testing laboratories and all other essential infrastructure.

LCD Monitor• EncouragingLCDmanufacturingbyofferingpreferentialexcisedutyratesandfacilitatingeasierreimbursementoftaxcredit.

• InvestinginR&DfornewdisplaytechnologiestohedgeagainstanyinvestmentmadeinTFTLCDdisplayfabrication.

• Encouraging local sourcing of electromechanical components, SMPS transformers and the plastic enclosures used in theassembly of LCD monitors by offering tax credits for vendors who source these components locally.

• EncouragingcompetenciesinthemanufactureofLCDdisplays,especiallyfortabletandlaptopapplications.Thiswouldrequireinvestment in generation 5 fabs, which are mostly being used for these end user applications. Also, generation 5 fabs are growing at only 3 percent a year while higher generation fabs are clocking almost 26 percent annual growth. This could mean that relocationof a generation 5 fab to a brownfield location could be done at an affordable level of investment.

Base stations (BTS)• IncentivizingindigenousIPwithpreferenceingovernmentprocurement.

• ExploringIndia-specificstandardsfromasecuritystandpoint.

• Decreasing the in-land freight costs from 17 percent to about 4 percent through subsidies to reduce costs for indigenousmanufacturing and encourage local value addition.

• EncouragingdomesticmanufacturerstobuildtheircapabilitiestodesignanddeveloppowersuppliesandantennaeusedintheBTS.

Power supplies• Thecomponentdutycurrentlyrangesbetween12.36to16.85percentwhichisconsideredhighfortheindustryespeciallysince

the Indian market is a price sensitive market. Offering subsidies for manufacturers who manufacture in bulk volumes.

• Ensuringcontinualavailabilityofcopperthroughtheyearatsubsidizedpricestoreducetheoverallcostofthecomponents.

• Settingupregionalleveltestinglabsfortestingimportedgoods.

Set top boxes• IndigenousmanufacturersneedpayasalestaxinadditiontolocalVAT(~12.5percent)thatmakeslocallymanufacturedproducts

more expensive than imported STBs. Issuance of Form C to alleviate the payment of sales tax in addition to local VAT.

• Increasing the import duty for STBs would help create a level playing field between global suppliers and indigenousmanufacturers;ithasbeenobservedthatthehikeinthesameduring2012-13budgetwasnotsufficientforthispurpose.

• ExportsubsidiestocreateminiclustersforremotemanufacturingofthevariouscomponentsthatgointoasettopboxincludingRCA cables, remote control and passive components.

• OptimizingthetaxstructurebeingleviedontheDTHindustryandcableoperatorstoalleviatetheoperationalchallengesbeingfaced by them.

• Offeringspeciallowinterestloanswouldhelpsustaingrowthandincreasetheamountofdomesticvalueaddition.




Printers and MFDs• OfferingtaxcreditsonR&Dactivityinhigh-endlaserprintingandMFDs.Thegovernmentcouldalsofacilitatetheformationof

joint ventures between indigenous players and global OEMs to take advantage of latent manufacturing capabilities; there could be export opportunities to the Middle East, Sri Lanka, and Africa due to India’s geographical location.

• Incentivizinglocalvalueadditionforcomponentssuchastransformers,PCBsandcabling,thatarecurrentlybeingmanufacturedin India, by offering preferential excise duties and greater CENVAT credit for suppliers.

Routers/switches• Creationoffundsforlocaltechnologyknow-howdevelopmentandincentivizinglocalIPgeneration

• FocusingonpromotinglocalmanufacturingofcomponentssuchascomplexPCBsforrouters byeitherofferingpreferentialexcise duty rates for the manufacturing of complex PCB designs or offering greater rates of CENVAT.

• Prioritizing/invitinginvestmentinPCBsmanufacturingundertheMSIPSschemeandofferassociatedbenefitstothoseinvestors.

CFL• ReducingVATforCFLmanufacturingtozeropercentacrossallstates

• DevelopingISIcertificationstostandardisemanufacturingofCFLsinthecountry.

Energy meters• Developmentofstandardsformanufacturingofsmartmeters,createaR&Dfundforinnovationsinsmartmeters,andalsocreate

opportunities for manufacturing of key individual components such as communication modules and transceivers.

• IncentivizingexportdutyandestablishingIndiaasanexporthubbyencouragingproductmodificationssuitinginternationalrequirements

• SettingupanR&DfundforsmartmeterstoencourageSMEmanufacturerstoinvestininnovation

• Incentivizemanufacturingofcommunicationmodulesandtransceivers

• Globalmarketingsupportforcash-strappedSMEsuppliers

Smart cards• Incentivizingsoftwaredevelopmentandcustomizationservices

• Creationofindigenousstandardsthatareapplicationspecificwiththeaimtoensurehighersecurityinthesmartcardsconsumedin the country.

• SettingupofsubsidizedtestingfacilitiesforEMVcompliance

• The Indianecosystemhasenormous skillsetavailability in the softwareand integrationpartof smart cardswhichcouldbeincentivized through offering appropriate R&D deductions.

• Encouraginglocalsourcingofplastic(PETG)byofferingpreferentialexciserateswhenrawmaterialsarelocallysourced.

GPON ONT• Creatingsupportivepolicieslikereducedexcisedutiestoencouragedomesticmanufacturing.

Tablets• RepealingthelevyofSADindividualelectroniccomponentsorindividualcomponentsofLCDmonitorsandmotherboards.

• IncentivizingthemanufactureofmotherboardandLCDmonitorsbyexemptingtheirindividualcomponentsfrombasiccustomsduty and excise duty, or offering preferential excise duty.

• Simplifyingthereimbursementprocessforclaimingtaxcreditoninputdutypaid

• Creatingacentreofexcellencefortabletstoconsolidatethedifferentdesigneffortsintheprivateandpublicsectorstodevelopworld-class commercial ‘Made in India’ tablets.

LED Lighting• RestrictivetaxstructurewithahighVATof14.5percentobstructsLEDlightingpenetration.ReductionintheVATandauniform

VAT structure across all states will increase penetration.

• MandatingBIStechnicalspecificationstostandardizemanufacturingprocessesandproducts.ImportedLEDlampsshouldalsobe tested rigorously to prevent dumping of goods in the local market.


Payment terminals• Fundsallocation forprovidingdomain training in thepayment industry forpeople in themanufacturingsectorofPOSand

payment enabling products.

• OfferingfundstoenabletheIndianITentrepreneurstodevelopthe’EMVKernel’targetingvariousemergingplatformsincludingAndroid

• SettingupofAccreditedLabs for EMVCertificationandPCI-PTS test facilities andprovideeasy, cost effective andproduct-amortizable testing access to device manufacturers.

• Currentexciseis14percentwhilecustomsdutyis12percent.Reductioninsales,VATandexcisedutytoattractmoremanufacturersto consider local manufacturing.

• Encouragingtheusageofnofrillsdebitcardswithnosurcharge;Taxrebatetomerchantsifatleast50percentoftheirtransactionsin value terms are through cards.

• Introductionofstandardsforproductsavailableinthemarkettoincreasecustomerconfidenceandallowmanufacturerstobuildscale simultaneously.

The chart below illustrates some common recommendations beyond the specific observations product-wise listed above for ecosystem development of the high priority products.


Creation of non tariff Import Barriers

Developing and Mandating Indigenous

Standards for all Products and

Components

Funding for R&D and Indigenous Technology Development – Centres

of Excellence

Offering Tiered CENVAT credit based on value

addition trends

Reduction in Excise Duties; Increase in

Abatement rate

Provision of subsidies / Low interest loans to SME Manufacturers

Common Recommendations

ConclusionsThe top 25 high priority products are significant contributors to the overall electronics consumption in India. Providing a favourable environment for developing the ecosystem for these in the country can contribute to high value adding local manufacturing of these products. Continuing domestic consumption, changing global supply chain dynamics and the slew of policy measures to support indigenous manufacturing are positively influencing local electronics design and manufacturing; and the time now is most opportune. Ensuring hassle-free implementation of the new initiatives and taking corrective measures on restrictive policies shall go a long way in building confidence in the Indian business environment among global companies and usher manufacturing investments into the country.Having identified the25highpriorityproducts andalso studied theecosystemSWOT for eachof these, the next steps entail addressing the challenges for ecosystem development for these 25 products, which implies addressing the issues for 80 percent of the electronics market in India. Developing the ecosystem for local design, development andmanufacturingfor80percentoftheelectronicsmarketlocallywillsufficetomakeIndiaaprominentleaderinthe$1.8trillionglobal electronics market.




The chart below captures the key messages from the research on the ecosystem SWOT of the high priority 25 products:

Key Messages: 25 High Priority Products Ecosystem SWOT

Top 25 high priority products account for 82% of overall electronics consumption in India. The top 5 alone account for 60% of the overall electronics consumption.

69% of local consumption of the top 25 priority products currently met through imports. Local production to cater to the same 31% local demand in 2015 too in the absence of intervention.

Inadequate components/raw materials ecosystem, convoluted tax and duty structure, debilitating FTAs, inadequate domestic product standards, lack of local IP, procedural hurdles in availing policy benefits are the challenges

to the ecosystem development for the priority products.

Power electronics/supply, Processor, LCD Display, Memory and PCB feature among the top 4 components contributing to the product BoM across majority of the top 25 high priority products. Initiatives are needed

to build ecosystem for these components locally.

Effective and speedy policy implementations, incentivizing component ecosystem, restructuring tax/duty structures, imposing non tariff trade barriers, developing indigenous standards are some of the measures identified to promote

ecosystem development for the high priority 25 products.

Strategic Recommendations• Aimtomeet50percentofdemandfor25highpriorityproductsbylocalhighvalueaddedmanufacturingby2018

• Address>20percentofthedisabilitycost inproducingthehighpriorityproducts locallybynormalizingdutystructureandcostofworking capital

• Providesubsidies/lowinterestloanstoaddressworkingcapitalissuesforSMEmanufacturers.

• FocusonEnergymeters,2WEMS,LEDlighting,paymentterminals, inverters/UPS,CFLandsmartcardsfortheshortterm.Existingmoderatevalueaddition,highdemandpotential,andexistingindigenousIP/designcapabilitymakethemviabletargets.

• Focusondevelopingkeycomponentsratherthantheproductitselfforthefollowingproducts-Mobilephones(battery/adaptor),FPDTV (LCD panels), laptops (battery) and digital camera (battery)– products where feasibility to develop a key component is more viable and recommended than the product itself.

• Focusondevelopingecosystemforkeycomponents–PCB,Memory,Processor,LCDDisplays,PowerDevicesandTransformers.

• ProvideasinglewindowsystemforquickclearanceofapplicationsundertheMSIPSandEMCpolicies.

• SkillDevelopmentCounciltofocusondevelopingskillsetsneededintheecosystemforthe25highpriorityproducts.

India Electronics & Semiconductor Association Head office: Unit-G-02, Ground Floor; Prestige Terminus II; 901 Civil Aviation Road; Konena Agrahara; (Old HAL Airport Exit Road); Bangalore-560 017. India. Phone: +91 80 4147 3250 Facsimile: +91 80 4122 1866New Delhi office: DBS Business Centre, First Floor, World Trade Tower, Barakhamba Lane, Connaught Place, New Delhi - 110 001 India

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